Share-Based Compensation | 9. Share-Based Compensation The purpose of our various share-based compensation plans is to attract, motivate, retain, and reward high-quality employees, directors, and consultants by enabling such persons to acquire or increase their proprietary interest in our common stock in order to strengthen the mutuality of interests between such persons and our stockholders and to provide such persons with annual and long-term performance incentives to focus their best efforts on the creation of stockholder value. Consequently, we determine whether to grant share-based compensatory awards subsequent to the initial award for our employees and consultants primarily on individual performance. Our share-based compensation plans with outstanding awards consist of our Amended and Restated 2001 Incentive Compensation Plan, or our 2001 Plan; our Amended and Restated 2010 Incentive Compensation Plan, or our 2010 Plan; and our 2010 Employee Stock Purchase Plan, or our 2010 ESPP. Share-based compensation awards available for grant or issuance for each plan as of the beginning of the fiscal year, including changes in the balance of awards available for grant for fiscal 2018, were as follows: Awards 2010 Available 2001 2010 Employee Under All Incentive Incentive Stock Share-Based Compensation Compensation Purchase Award Plans Plan Plan Plan Balance at June 2017 2,947,069 — 2,566,899 380,170 Additional shares authorized 2,346,384 — 2,000,000 346,384 Stock options granted (61,825 ) — (61,825 ) — Deferred stock units granted (1,331,073 ) — (1,331,073 ) — Market stock units granted (300,071 ) — (300,071 ) — Performance stock units granted (315,380 ) — (315,380 ) — Market stock units performance adjustment 68,003 — 68,003 — Purchases under employee stock purchase plan (486,263 ) — — (486,263 ) Forfeited 692,035 4,500 687,535 — Plan shares expired (4,500 ) (4,500 ) — — Fungible Shares Ratio Adjustment (1,344,162 ) — (1,344,162 ) — Balance at June 2018 2,210,217 — 1,969,926 240,291 Our 2001 Plan, which expired in March 2011, was replaced by our 2010 Plan. Option awards that are currently outstanding under our 2001 Plan will remain outstanding until exercised, delivered, forfeited, or cancelled under the terms of their respective grant agreements. During the three months ended September 30, 2017, we adopted the accounting standard update, or ASU, for Compensation-Stock Compensation which was issued by the Financial Accounting Standards Board, or FASB. This update simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Upon adoption of this ASU, we elected to change our accounting policy to account for forfeitures as they occur and we applied the accounting policy change on a modified retrospective basis. As a result of the adoption of this ASU, we recognized the net cumulative effect of this change as a $24.7 million increase to retained earnings, a $1.0 million increase to additional paid-in capital and established an additional $25.7 million of deferred tax assets for research credit and alternative minimum tax credit carryforwards. We have reflected excess tax benefits for share-based payments in the statement of cash flows as operating activities rather than financing activities on a prospective basis and therefore, prior periods have not been adjusted. Share-based compensation and the related tax benefit recognized in our consolidated statements of income for fiscal 2018, 2017, and 2016 were as follows (in millions): 2018 2017 2016 Cost of revenue $ 3.2 $ 2.2 $ 1.8 Research and development 38.6 33.1 30.6 Selling, general, and administrative 29.5 26.5 24.4 Total $ 71.3 $ 61.8 $ 56.8 Income tax benefit on share-based compensation $ 11.1 $ 16.1 $ 14.7 We recognize a tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options, DSUs, MSUs, and PSUs, but we cannot recognize a tax benefit concurrent with the recognition of share-based compensation expenses associated with incentive stock options and employee stock purchase plan shares (qualified stock awards). For qualified stock awards we recognize a tax benefit only in the period when disqualifying dispositions of the underlying stock occur, which historically has been up to several years after vesting and in a period when our stock price substantially increases. We determine excess tax benefit using the long-haul method in which we compare the actual tax benefit associated with the tax deduction from share-based award activity to the hypothetical tax benefit based on the grant date fair values of the corresponding share-based awards. Tax benefit associated with excess tax deduction creditable to income tax provision is recognized when incurred. Tax deficiency associated with a tax shortfall is debited to income tax provision when incurred. Historically, we have issued new shares in connection with our share-based compensation plans, however, treasury shares are also available for issuance. Any additional shares repurchased under our common stock repurchase program will be available for issuance under our share-based compensation plans. Stock Options Our share-based compensation plans with outstanding stock option awards include our 2001 Plan and our 2010 Plan. Under our 2010 Plan, we may grant incentive stock options or nonqualified stock options to purchase shares of our common stock at not less than 100% of the fair market value, or FMV, on the date of grant. Options granted under our 2010 Plan generally vest three to four years from the vesting commencement date and expire seven years after the date of grant if not exercised. Certain stock option activity for fiscal 2018 and balances as of the end of fiscal 2018 were as follows: Stock Weighted Option Average Intrinsic Awards Exercise Value Outstanding Price (In millions) Balance at June 2017 2,490,168 $ 49.20 Granted 61,825 45.32 Exercised (690,310 ) 24.08 Forfeited (105,124 ) 59.36 Expired (138,350 ) 72.08 Balance at June 2018 1,618,209 57.14 $ 9.2 Exercisable at June 2018 1,378,833 57.09 $ 8.9 The aggregate intrinsic value was determined using the closing price of our common stock on the last trading day of fiscal 2018, or June 29, 2018, of $50.37 and excludes the impact of options that were not in-the-money. Approximately 32% of the stock option awards outstanding were vested and in-the-money as of the end of fiscal 2018. At the end of fiscal 2018, we estimated that we have 1.6 million fully vested options with an aggregate intrinsic value of $9.2 million, having a weighted average exercise price of $57.14 and a weighted average remaining contractual term of 3.31 years. The weighted average remaining contractual term for the options exercisable is approximately 2.96 years. Cash received and the aggregate intrinsic value of stock options exercised for fiscal 2018, 2017, and 2016 were as follows (in millions): 2018 2017 2016 Cash received $ 16.7 $ 10.7 $ 16.6 Aggregate intrinsic value $ 15.2 $ 12.3 $ 29.7 The fair value of each award granted under our share-based compensation plans for fiscal 2018, 2017, and 2016 was estimated at the date of grant using the Black-Scholes option pricing model, assuming no expected dividends and the following range of assumptions: 2018 2017 2016 Expected volatility 46.2% 45.2% - 48.3% 40.4% - Expected life in years 4.4 3.8 3.8 Risk-free interest rate 1.8% 1.03% - 1.94% 1.22% - 1.72% Fair value per award $ 18.04 $ 21.08 $ 28.30 The unrecognized share-based compensation costs for stock options granted under our various plans were approximately $4.3 million as of the end of fiscal 2018, to be recognized over a weighted average period of approximately 1.43 years. Deferred Stock Units Our 2010 Plan provides for the grant of DSU awards to our employees, consultants, and directors. A DSU is a promise to deliver shares of our common stock at a future date in accordance with the terms of the DSU grant agreement. We began granting DSUs in January 2006. DSUs granted under our 2010 Plan generally vest ratably over three to four years from the vesting commencement date. Delivery of shares under the plan takes place on the quarterly vesting dates. At the delivery date, we withhold shares to cover statutory minimum tax withholding by delivering a net quantity of shares. Until delivery of shares, the grantee has no rights as a stockholder. An election to defer delivery of the underlying shares for unvested DSUs can be made by the grantee provided the deferral election is made at least one year before vesting and the deferral period is at least five years from the scheduled delivery date. DSU activity, including DSUs granted, delivered, and forfeited in fiscal 2018, and the balance and aggregate intrinsic value of DSUs as of the end of fiscal 2018 were as follows: Aggregate Weighted Intrinsic Average DSU Awards Value Grant Date Outstanding (in millions) Fair Value Balance at June 30, 2017 1,320,798 $ 69.14 Granted 1,331,073 40.52 Delivered (545,028 ) 70.26 Forfeited (253,285 ) 58.42 Balance at June 30, 2018 1,853,558 $ 93.4 49.75 Of the shares delivered, 138,499 shares valued at $5.4 million were withheld to meet statutory minimum tax withholding requirements. The aggregate intrinsic value was determined using the closing price of our common stock on the last trading day of fiscal 2018, or June 29, 2018, of $50.37. The unrecognized share-based compensation cost for DSUs granted under our 2010 Plan was approximately $108.1 million as of the end of fiscal 2018, which will be recognized over a weighted average period of approximately 2.03 years. The aggregate market value of DSUs delivered in fiscal 2018, 2017, and 2016 was $21.4 million, $24.3 million, and $26.7 million, respectively. Market Stock Units Our Amended and Restated 2010 Incentive Compensation Plan provides for the grant of MSU awards, to our employees, consultants, and directors. An MSU is a promise to deliver shares of our common stock at a future date based on the achievement of market-based performance requirements in accordance with the terms of the MSU grant agreement. We have granted MSUs to our executive officers and other management members, which are designed to vest in three tranches with the target quantity for each tranche equal to one-third of the total MSU grant. The first tranche vests based on a one-year performance period; the second tranche vests based on a two-year performance period; and the third tranche vests based on a three-year performance period. Performance is measured based on the achievement of a specified level of total stockholder return, or TSR, relative to the TSR of the S&P Semiconductor Select Industry Index, or SPSISC Index, for grants made beginning in fiscal 2018 and relative to the Philadelphia Semiconductor Index, or SOX Index, for grants made prior to fiscal 2018. The potential payout ranges from 0% to 200% of the grant target quantity and is adjusted on a two-to-one ratio based on our TSR performance relative to the SPSISC Index TSR or SOX Index TSR using the following formula: (100% + ([Synaptics TSR—{SPSISC Index TSR or SOX Index TSR}] x 2)) The payout for tranche one and two will not exceed 100% and the payout for tranche three will be calculated based on the total target quantity for the entire grant multiplied by the payout factor, based on performance for the three-year performance period, less shares issued for the first tranche and the second tranche. Delivery of shares earned, if any, will take place on the dates provided in the applicable MSU grant agreement, assuming the grantee is still an employee, consultant, or director of our company at the end of the applicable performance period. On the delivery date, we withhold shares to cover statutory tax withholding requirements and deliver a net quantity of shares to the employee, consultant, or director after such withholding. Until delivery of shares, the grantee has no rights as a stockholder with respect to any shares underlying the MSU award. MSU activity, including MSUs granted, delivered, and forfeited in fiscal 2018, and the balance and aggregate intrinsic value of MSUs as of the end of fiscal 2018 were as follows: Aggregate Weighted Intrinsic Average MSU Awards Value Grant Date Outstanding (in millions) Fair Value Balance at June 30, 2017 158,596 $ 82.88 Granted 300,071 53.02 Performance adjustment (68,003 ) — Delivered — — Forfeited (35,938 ) 76.93 Balance at June 30, 2018 354,726 $ 17.9 59.37 As a result of the Synaptics TSR underperforming the SOX Index TSR by 118 percentage points, we did not deliver any of the targeted shares underlying the October 2014 MSU grants. As a result of the Synaptics TSR underperforming the SOX Index TSR by 115 percentage points, we did not deliver any of the targeted shares underlying the October 2015 MSU grants. As a result of the Synaptics TSR underperforming the SOX Index TSR by 60 percentage points, we did not deliver any of the targeted shares underlying the October 2016 MSU grants The aggregate intrinsic value assumes a 100% payout factor and was determined using the closing price of our common stock on the last trading day of fiscal 2018, or June 29, 2018, of $50.37. The fair value of each MSU granted from our plans for fiscal 2018, 2017, and 2016 was estimated at the date of grant using the Monte Carlo simulation model, assuming no expected dividends and the following assumptions: 2018 2017 2016 Expected volatility of company 49.16% - 50.60% 52.54 % 45.57 % Expected volatility of SOX index 22.37% - 22.52% 21.23 % 19.65 % Correlation coefficient 0.52 - 0.53 0.45 0.42 Expected life in years 2.80 - 2.92 2.92 2.94 Risk-free interest rate 1.72% - 1.88% 1.01 % 0.92 % Fair value per award $48.22 - $59.19 $ 67.51 $ 126.74 We amortize the compensation expense over the three-year performance and service period. The unrecognized share-based compensation cost of our outstanding MSUs was approximately $14.4 million as of the end of fiscal 2018, which will be recognized over a weighted average period of approximately 1.12 years. Performance Stock Units Our Amended and Restated 2010 Incentive Compensation Plan provides for the grant of PSU awards to our employees, consultants, and directors. A PSU is a promise to deliver shares of our common stock at a future date based on the achievement of performance-based requirements in accordance with the terms of the PSU grant agreement. We have granted PSUs to our executive officers and other management members, which are designed to vest in three tranches with the target quantity for each tranche equal to one-third of the total PSU grant. The grants have a specific one-year performance period and vesting occurs over three service periods with the final service period ending approximately three years from the grant date. Performance is measured based on the achievement of a specified level of non-GAAP earnings per share. The potential payout ranges from 0% to 200% of the grant target quantity and is adjusted on a linear basis with a payout triggering if our non-GAAP earnings per share equals greater than 65% of the target with a maximum payout achieved at 135% of target. Delivery of shares earned, if any, will take place on the dates provided in the applicable PSU grant agreement, assuming the grantee is still an employee, consultant, or director of our company at the end of the applicable service period. On the delivery date, we withhold shares to cover statutory tax withholding requirements and deliver a net quantity of shares to the employee, consultant, or director after such withholding. Until delivery of shares, the grantee has no rights as a stockholder with respect to any shares underlying the PSU award. During the fiscal year ended June 30, 2018, there were 315,380 PSUs granted, 20,839 PSUs forfeited, and no PSUs were delivered. The aggregate intrinsic value of all outstanding PSUs as of June 30, 2018, was $14.8 million. We value PSUs using the aggregate intrinsic value on the date of grant and amortize the compensation expense over the three-year service period on a ratable basis, dependent upon the probability of meeting the performance measures. The unrecognized share-based compensation cost of our outstanding PSUs was approximately $7.7 million as of June 30, 2018, which will be recognized over a weighted average period of approximately 1.42 years. Employee Stock Purchase Plan Our 2010 Employee Stock Purchase Plan, or ESPP, became effective on January 1, 2011. The 2010 ESPP allows employees to designate up to 15% of their base compensation, subject to legal restrictions and limitations, to purchase shares of common stock at 85% of the lesser of the FMV at the beginning of the offering period or the exercise date. The offering period extends for up to two years and includes four exercise dates occurring at six-month intervals. Under the terms of our 2010 ESPP, if the FMV at an exercise date is less than the FMV at the beginning of the offering period, the current offering period will terminate and a new two-year offering period will commence. Shares purchased, weighted average purchase price, cash received, and the aggregate intrinsic value for employee stock purchase plan purchases in fiscal 2018, 2017, and 2016 were as follows (in millions, except shares purchased and weighted average purchase price): 2018 2017 2016 Shares purchased 486,263 302,085 302,781 Weighted average purchase price $ 32.07 $ 46.74 $ 52.42 Cash received $ 15.6 $ 14.1 $ 15.8 Aggregate intrinsic value $ 3.9 $ 2.7 $ 7.0 The fair value of each award granted under our 2010 ESPP for fiscal 2018, 2017, and 2016 was estimated using the Black-Scholes option pricing model, assuming no expected dividends and the following range of assumptions: 2018 2017 2016 Expected volatility 43.7 - 49.8% 38.4 - 54.9% 37.4% - 40.6% Expected life in years 0.5 - 2.0 0.5 - 2.0 0.5 - 1.0 Risk-free interest rate 1.42% - 2.45% 0.62% - 1.20% 0.33% - 0.54% Fair value per award $ 13.54 $ 20.44 $ 24.52 The expected volatility is based on either implied volatility for the expected lives of 0.5 years or a weighting of implied and historical volatility for expected lives greater than 0.5 years; the expected life is the period starting at the enrollment date until each purchase date remaining in the offering period at the date of enrollment in the plan; and the risk free interest rate is based on U.S. Treasury yields or yield curve in effect for each expected life. Unrecognized share-based compensation costs for awards granted under our 2010 ESPP at the end of fiscal 2018 were approximately $12.9 million that will be amortized over the next 16 months. |